The Teeming Brain

U.S. accountant-in-chief: ‘We’ve never seen the likes of what’s coming’ - Financial Times, Jan. 29

An influential US official on Tuesday hit out at his country’s “addiction to debt,” warning that the federal budget was on an “imprudent and unsustainable path” due to ballooning healthcare costs.

David Walker, US comptroller general, warned a Senate budget committee hearing that while recent falls in the budget deficit were encouraging, the long-term fiscal outlook was grim.

….”If there is one thing that could bankrupt America, it is runaway health costs. We must not allow this to happen. This is our addiction to debt.”

Mr Walker’s comments echo a warning he made last year, in which he urged the US to “learn from the fall of Rome” and deal quickly with a “burning platform” of unsustainable policies, including fiscal deficits.

….Mr Walker conceded that current deficit and debt levels were “not a major problem.” But he said the difference this time was that the US would be unable to grow its way out of a long-term fiscal crunch. “We’ve never seen anything like what we are headed into.”

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U.S. in real economic trouble - Time, Jan. 24 (Feb. 4. print issue)

Say what you will about today’s global economy, it ain’t dull. In a cascade of worry on a single trading day, Jan. 21, Hong Kong’s Hang Seng index plunged 8.6%, Tokyo’s Nikkei 5.7% and Mumbai’s Sensex 12.9%. It was a worldwide mini-meltdown, and the Federal Reserve Board wasn’t about to let that go unanswered. Before the U.S. markets had even opened, Fed Chairman Ben Bernanke — not a man known for dramatic gestures — slashed a key interest rate three-quarters of a percentage point. The surprise move arrested the rout, and the markets have since rallied, but investors are left to absorb an unavoidable truth: the U.S., still the world’s biggest market for exports, appears to be in real economic trouble.

….And so whatever happens in the markets this year, you probably will not feel as house-proud as you did two years ago. Someone you know will be looking for a new job. And gas won’t be getting much cheaper. The Fed can’t magically make all that go away. Neither can Congress or the White House. The best they can do is keep it from getting any worse than it has to be.

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Darker Days Ahead? Robert Reich warns a recession, or worse, may be coming - Newsweek, Jan. 23

Think the last few days have been bad for Wall Street and the rest of the world’s markets? Hang on, things are probably going to get worse, says Robert Reich, President Clinton’s former secretary of Labor and author of the recent book Supercapitalism: The Transformation of Business, Democracy and Everyday Life. According to Reich, who currently teaches public policy at the University of California, Berkeley, the United States might even be headed toward a depression.

[Excerpts from Newsweek's interview with Reich:]

The Fed is clearly becoming aware of the serious potential of an economic meltdown. The size of the [recent interest-rate] cut is larger than anyone expected because the Fed usually moves in [increments of] .25 or .50 percentage points.

….[Bernanke's decision to surprise the market] underscores the seriousness of the current economic problems

….The fact is that no one knows anything. Investors are flying blind. Even experienced Wall Street hands have no idea whether we’re near the bottom. We can expect even more violent swings in the stock market. The reason for all the uncertainty is that the big banks and lenders simply have no idea how many bad loans they’re holding. [During the housing bubble] credit markets evolved such complex ways of reselling and repackaging debt that even many top Wall Street professionals simply have no idea of the risks and costs they’re involved with.

….[S]everal managing directors on the Street, whose opinions I trust, have said to me that the chances for a depression are 20 percent. That matches my sense. In other words, it’s still low, but 20 percent is nonetheless far higher a probability than anyone should be comfortable with. Even absent a depression, it seems likely that the coming recession will be deeper than the last several.

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Jim Rogers: This recession will be really, really bad - Fortune, Jan. 31

You might expect Jim Rogers to be gloating a little bit. After all, the famed investor has been predicting a recession in the U.S. economy for months and shorting the shares of now-tanking Wall Street investment banks for even longer . . . . But when I reached him by phone in Singapore the other day there was little hint of celebration in his voice. Instead, he took a serious tone.

“I’m extremely worried,” he says. “I have been for a while, but I just see things getting much worse this time around than I expected.” To Rogers, a longtime Fed critic, Bernanke’s decision to ride to the market’s rescue with a 75-basis-point cut in the Fed’s benchmark rate only a week before its scheduled meeting is the latest sign that the central bank isn’t willing to provide the fiscal discipline that he thinks the economy desperately needs.

“Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I’m afraid it’s going to be much worse,” he says. “Bernanke is printing huge amounts of money. He’s out of control and the Fed is out of control. We are probably going to have one of the worst recessions we’ve had since the Second World War. It’s not a good scene.“

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Driving Towards Disaster - Newsweek, Jan. 28

If you want to see what hard times look like, come to Michigan. Last week’s manic markets fueled fears that America, or perhaps even the global economy, is tumbling into recession. But Michigan has been an economic wasteland for virtually the entire decade. Its fortunes riding shotgun with America’s ailing auto industry, Michigan has lost more than 400,000 manufacturing jobs since 1999. Its unemployment rate, 7.6 percent in December, has been at or near the highest in the nation since 2003. FOR SALE signs dot the landscape, even in the neighborhood of GM chairman Rick Wagoner. But there are few buyers: Foreclosures have quadrupled in the last two years, according to the Web site RealtyTrac.com. The Sunday Detroit Free Press recently printed a 121-page section listing thousands of homes facing foreclosure. And in the last year, 30,500 people have left Michigan, Census officials estimate.

“Michigan is the worst economy in the country, by far,” says economist Mark Zandi of Moody’s Economy.com. “But the financial pain Michigan is suffering now will become evident in many other parts of the country by this summer.”

Indeed, these days Michigan is looking more like the canary in the coalmine, than the isolated “one-state recession” native son Mitt Romney spoke of during his primary victory there . . . . [M]any of the factors that drove Detroit into the ditch — $100-a-barrel oil, the credit crisis, globalization — also are preying on the rest of the nation.

….”I worry about this every day,” says [financially distressed autoworker Sean] Gurskey, who has taken to plowing snow for extra money. “You wonder if you’ll have a job, if you can make your house payment. I don’t want to feel like I’ve failed my family.” It’s a feeling the rest of the country could become familiar with soon.

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Former Morgan Stanley chief strategist advising the rich to buy a farm and stock up on seed, food, clothing, medicine, etc. - Bloomberg.com, Jan. 29

Barton Biggs has some offbeat advice for the rich [in his new book Wealth, War, and Wisdom]: Insure yourself against war and disaster by buying a remote farm or ranch and stocking it with “seed, fertilizer, canned food, wine, medicine, clothes, etc.”

…. Biggs is no paranoid survivalist. He was chief global strategist at Morgan Stanley before leaving in 2003 to form hedge fund Traxis Partners. He doesn’t lock and load until the last page of this smart look at how World War II warped share prices, gutted wealth and remains a warning to investors. His message: Listen to markets, learn from history and prepare for the worst.

….The “wisdom” in the alliterative title refers to the spooky way markets can foreshadow the future. Biggs became fascinated with this phenomenon after discovering by chance that equity markets sensed major turning points in the war.

….Mankind endures “an episode of great wealth destruction” at least once every century, Biggs reminds us. So the wealthy should prepare to ride out a disaster, be it a tsunami, a market meltdown or Islamic terrorists with a dirty bomb.

….”Events move much faster than anyone expects,” he says, “and the barbarians are on top of you before you can escape.”

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New report: U.S. economy much weaker than expected - CNNMoney.com, Jan. 30

Economic growth nearly ground to a halt in the last three months of the year, according to a government report released Wednesday that showed the sharpest decline in growth since 2003.

The report raised fears of a recession and increased hopes that the Federal Reserve will make another significant interest rate cut.

Gross domestic product, the broadest measure of the nation’s economic activity, grew at an annual rate of 0.6%, adjusted for inflation, in the fourth quarter, according to the Commerce Department. That’s down from a final reading of 4.9% growth for the third quarter. Economists surveyed by Briefing.com had forecast GDP would slow to a 1.2%.

The anemic growth in the fourth quarter matched the slowest expansion in the economy in the last five years. The report comes amid rising concerns that the U.S. economy is falling into a recession, with some economists arguing the downturn started in the final month of 2007.

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Bubble-based U.S. economy is like a rampaging killer robot - Paul B. Farrell, MarketWatch, Jan. 28

What’s so scary is not that the subprime bubble was happening so fast on the heels of the dot-com bubble, not that the pundits, the public and the policy makers all appeared to be ignoring it. What’s really scary is that our best and brightest leaders in Washington, Wall Street and Corporate America wanted to create a bubble! They even threw jet fuel on this raging fire with cheap money, favorable taxes and minimal oversight.

Of course the Treasury and the Fed will never admit it, but they saw the housing bubble as a healthy economic necessity in their warped ideology! In their myopic minds, the housing bubble was the messiah “saving” America from a big, bad bear/recession.

Publicly they denied the bubble’s toxicity, dismissing it as “regional froth.” Privately, they conspired to create a massive new bubble driving America deep into debt.

This new ideology is extremely dangerous: It assumes the American economy can no longer be managed by politicians or Wall Street quants. The “new economy” has a life of its own, a “Terminator” from a dark future, an “I, Robot” from Asimov’s sci-fi world.

Yes, our economy has become a self-sustaining “bubble-blowing machine” inventing new bubbles at warp-speed even before the last is buried….

….There’s a higher truth: The best (not worst) strategy would be to let the “bubble-blowing machine” implode, live with the absence of a new bubble for a while, then quietly step back and reassess our unsustainable “growth-at-all-costs” economic policies that are secretly designed to benefit the self-interests of Wall Street’s insiders who profit by endlessly blowing bubble after bubble … after bubble … after ….

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Housing Downturn Squeezing Schools - The Washington Post, Jan. 30

The rapid cooling of the Washington area’s real estate market has hit school systems with force, abruptly ending years of plenty and compelling superintendents to ask their teachers, bus drivers and custodians to do more with less.

….Because school systems rely mainly on state and county government funding, and those governments draw most of their revenue from property taxes, a regional 7.7 percent drop in home values during the third quarter of last year has stopped the rapid growth of education budgets. And as can be seen with jittery stock markets across the world, it is unclear whether the storm is over.

For school administrators, the economic instability could not have happened at a worse time. The federal No Child Left Behind law, with its mandate that all students show proficiency in reading and math by 2014, threatens schools that fail to comply with restructuring and state takeover.

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U.S. homebuilders face growing bankruptcy threat - Financial Times, Jan. 29

The risk of bankruptcies among the big US homebuilders has risen sharply as the economy has weakened and an end to the housing slump remains distant.

Credit default swaps on homebuilders, which act as insurance on corporate debt, suggest some of the biggest are at risk of failing to keep up debt payments.

….”They are at the epicentre of what…is going to be a pretty bad recession,” Mr. [Byron] Douglass [an analyst at Credit Derivatives Research] said. “The first companies we are going to see defaults on are homebuilders.”

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Foreclosures up 75% in 2007 - CNNMoney.com, Jan. 29

The number of foreclosures soared in 2007, with 405,000 households losing their home, according to a report released Tuesday.

Total foreclosure filings soared 97% in December alone compared with December of 2006, according to RealtyTrac, an online seller of foreclosure properties. For the year, total filings — which include default notices, auction sale notices and bank repossessions — grew 75%.

….The rise nationally has confounded some community advocates. “Last December, we thought the national numbers were bad, and now they’re up almost 100 percent,” said John Taylor, CEO of the National Community Reinvestment Coalition.

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Home ownership in record plunge - CNNMoney.com, January 29

The housing and mortgage meltdown caused the biggest one-year drop in the rate of homeownership on record, according to government figures released Tuesday.

….The report also also showed a record 2.18 million homes vacant and available for sale in the fourth quarter, up from the 2.07 million in the third quarter and the 2.1 million a year earlier.

….The glut of vacant homes is a sign the evaporation of demand for home sales, which has hammered housing values. It also signals bad news for homebuilders, who were stuck with a record inventory of 195,000 completed homes at the end of December. A separate Census Bureau report Monday showed the biggest drop in new home sales on record in 2007.

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Recession puts Florida housing market in a death grip - The Dallas Morning News, Jan. 26

FORT MYERS, Fla. – Here, people don’t ask whether we are headed for a recession. They know a recession is here. For those who live here, the questions narrow down to two: How much worse will it get? How long will it last?

For some residents, everything hangs in the balance. And I mean everything.

A doctor friend once told me of an eerie feeling he got. Tending a dying patient, he’d look out the hospital room window for a moment. Outside, life went on without a pause. The automobile traffic never stopped; people were still in a hurry.

I feel the same way as I drive down U.S. 41, which connects Cape Coral, Fort Myers, Bonita Springs and Naples. The roads are still busy. The cars are still shiny. Massive new shopping centers greet the snowbirds, the early retirees setting up house and the usual vacationers escaping the cold of Minnesota, Michigan, Massachusetts and Maine.

But something is wrong in paradise.

….According to Fort Myers MLS Board figures, it would take 44.5 months – nearly four years – to work off the current inventory of homes for sale. That doesn’t count the discouraged sellers who have taken their houses off the market but still want to sell.

[Cardin comments: This column about the situation in Fort Myers, Florida gives a picture of what the current recession looks like in a relatively wealthy area of the U.S., one that was riding high on the bubble before it burst. For a sharply contrasting glimpse at what it looks like in a poorer area that got caught up in the bubble in its own way, read the next story below.]

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U.S. mortgage crisis creates ghost town - Breitbart.com, Jan. 27

The streets are empty. Trash rustles down the road past rusted barbecues, abandoned furniture, sagging homes and gardens turned to weed. This is Shaker Heights, a suburb of Cleveland and a town ravaged by the subprime mortgage crisis roiling the United States.

Faded “for sale” signs sit in front of deserted houses. The residents are gone, either in search of new jobs after the factories shut down, or in shame after being evicted for missing their mortgage payments.

….Laura Johnston, 50, says that her street — about 10 minutes away by car — was alive two years ago. Today, half the houses are abandoned.

“Folks could not afford their payments. They were asked to pay loans which doubled. They could not afford it, some lost their job. Lenders were greedy. They threw them out of their homes,” she told AFP.….

For county treasurer Jim Rokakis, the greed of the banks is to blame for this man-made disaster. “All you needed was a pulse to buy a house. Some loans were written with no money down, no proof of buyer’s incomes. They did not even check what people were saying. Most of those folks were jobless,” he said in an interview. “Shaker Heights was the perfect storm: poor folks, unemployed and a desire to get a piece of the American Dream.”

Cardin comments: You know life on planet earth has gotten weird when conventionally respectable mainstream news sources start running stories that sound like what would have formerly been dismissed as the ravings of a conspiracy nut. But — and this is a crucial point — is anybody really listening?

Case in point: an analysis piece from Sunday’s Boston Globe titled “The black box economy” (linked below). Is it really true that there is a global “shadow banking system” operating outside the normal boundaries of what an Economics 101 class would define and accept as economics? Has the financial world really been overtaken by and transformed into a kind of gothic patchwork monster of inconceivable size and complexity, what Bill Gross, manager of Pimco, the world’s largest bond investment fund, recently called a “Frankenstein levered body of shadow banks”? Are the much-vaunted controls and techniques of the central banking system really inadequate to deal with the vast problems now arising from this shadowy system that categorically eludes conventional economic understanding? The Globe devotes a long article to exploring the possibility that it Just Might Be So.

Weird times indeed. While you’re considering this, don’t fail to factor in a comment from the cover story for the February 4 issue of Newsweek, titled “The U.S. Economy Faces the Guillotine” (also linked below). After surveying the mortar-blasted surface of the current American economic landscape, journalist Daniel Gross says, “The current troubles were years in the making, and in retrospect, easy to see coming.”

In retrospect? In retrospect? Well, yes, I suppose so. But only if your sole source of news is the MSM (mainstream media), probably consisting of 95 percent television — not complete news broadcasts or investigative/analytical reports but just snippets of national and, God help us, local newscasts that you’ve half listened to while eating dinner or checking email — and then an additional five percent made up of what has entered your consciousness by means of your local newspaper and publications like Newsweek, which you may have just skimmed for the headlines (or sale ads) instead of actually reading. If that’s your world, then yes, I suppose the fact that the U.S. economy is currently “facing the guillotine” may come as quite a shock since it is only in retrospect that such a possibility is even remotely conceivable.

But if you’ve paid attention to the host of economists, investors, and culture critics, some of them speaking inside the mainstream and some of them outside it, who have been predicting the current crisis for many months and even years now — including Warren Buffet, James Howard Kunstler, Peter Schiff, Bill Gross, Nouriel Roubini, John Michael Greer, Stephen Roach, and many others — then none of this is a surprise. The only surprising thing about it is that it took so long to arrive.

Weird times. No doubt about it. More and more I’m drawn back to my diagnosis of contemporary American culture as a Fahrenheit 451 situation without the book burning. Bradbury pointed out a few years ago that burning books isn’t necessary to destroy a culture. Just get people to stop reading them.

I say we should expand this idea to encompass the broader field of reading in general, not just books but all kinds of print media. Expand it to encompass all media, in fact. Then the maxim becomes, “You don’t have to black out ideas and information to destroy a culture. Just get people to stop to stop caring about them.” For an illustration, consider our supposedly super-informed society with its abundance of books, magazines, newspapers, televisions, broadcast and cable channels, computers, Websites, etc. We’re practically drowning in potential sources of ideas and information. A lot of people have been speaking through these media and predicting severe economic troubles for the U.S. for a long time. And yet mainstream opinion, as gauged by the attitude of Newsweek, holds that the current economic crisis is easily foreseeable “only in retrospect.”

So it’s obviously true that you don’t have to burn books or block any other information source to destroy a culture. Just get people to focus on the next incarnation of Survivor. Send them to the mall in a frantic lemming-like mob to search for post-Thanksgiving bargains. Dazzle them with advertisements for no-money-down, no-payments-for-six-months bargain sales. Awe them with some new form of boneless chicken wing, which you bring to their attention by spending tens of millions of advertising dollars. Send them into fits of raucous laughter, swoons of romantic rapture, screams of roller-coaster excitement, and all manner of other excessive emotions by giving them music, movies, books, and television shows about, well, not much of anything. If at any point they feel like they ought to “get serious” and focus on “important” things, direct them to a polarized national political circus whose opposing sides speak in sound bites and focus on three or four pseudo-issues to the exclusion of everything else. Then, when the people have had enough of this edification, plug them back into the entertainment matrix.

Along with all of this, and on a sadder note, you can do what Barbara Ehrenreich points out in her piece (linked below) about the uselessness of traditional economic indicators for identifying recession or depression in our current circumstance: bring about a situation of two separate and increasingly unequal economic worlds. This, too, will effectively block information and understanding. The rich will love their cushy lifestyles and thus, as we’ve seen, will by and large refuse to acknowledge the problems in an economic scenario that is obviously rigged to blow. After all, who wants to mess with a system that gives you McMansions, private jets, jewelry, and Hummers? The poor, for their part, will know their own increasing desperation all too well, but will be effectively prevented from focusing on its large scale causes by the hard-edged necessity of focusing on day-to-day survival for themselves and their families. Again, the net result will be that members of both strata ignore, fail to understand, or never hear the voices coming through Websites, magazines, and the rare television screen that warn of Trouble Ahead.

Who needs to burn books in a situation like this? I just wish we could have seen the economic troubles coming. But dang it all, they were foreseeable “only in retrospect.”

Oops — no more time for reading and thinking. The new season of Big Brother is starting and I want to catch up on the Cartoon Network. I just hope this darned “recession” thingie that I keep hearing about will leave me with enough money to pay my cable bill!

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U.S. economy in serious trouble - Harper’s online, Jan. 27

“Our economy is in serious trouble,” writes Eric Janszen in the cover story for the February Harper’s. “Both the production-consumption sector and the FIRE [finance, insurance and real estate] sector know that a debt-inflation Armageddon is nigh, and both are praying for a timely miracle, a new bubble to keep the economy from slipping into a depression.” A well-known venture capitalist, Janszen is the founder and owner of iTulip.com. His is hardly the only voice on the markets today invoking apocalyptic notes . . . . [But] Janszen pulls in for a close-up view of the bubble cycle which, he argued, has come to mark the American economy.

[From Janszen's cover story:]

The housing bubble has left us in dire shape, worse than after the technology-stock bubble, when the Federal Reserve Funds Rate was 6 percent, the dollar was at a multi-decade peak, the federal government was running a surplus, and tax rates were relatively high, making reflation—interest-rate cuts, dollar depreciation, increased government spending, and tax cuts—relatively painless. Now the Funds Rate is only 4.5 percent, the dollar is at multi-decade lows, the federal budget is in deficit, and tax cuts are still in effect. The chronic trade deficit, the sudden depreciation of our currency, and the lack of foreign buyers willing to purchase its debt will require the United States government to print new money simply to fund its own operations and pay its 22 million employees.

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The U.S. Economy Faces the Guillotine - Newsweek, Feb. 4 issue (cover story)

The Great Global Market Freak-Out of 2008 has everyone asking whether the United States — already on the road to recession — is entering into a protracted period of economic trouble where jobs will be slashed, prices will continue to rise and the dollar will keep falling; and if so, whether the declining U.S. economy will pull the rest of the world down with it . . . Though world markets stabilized by late last week, buoyed by the Fed’s rate-cut action and a proposed stimulus package of $150 billion that was hastily cobbled together by leaders in the House of Representatives and President Bush, the question remains: how ugly will it get, and when will it end? The disappointing jobs and retail-sales data from December indicate the economy has stalled. Given the complex financial machinery that now connects the world’s market, will a U.S. recession quash the booming growth we’ve seen in emerging markets like India and China and tip European economies over the edge? “We are, of course, far short of a Great Depression now,” said Nouriel Roubini, professor of economics at New York University’s Stern School of Business. “But in terms of systemic risk and the risks of a financial meltdown, you almost have to go back that far to find a good analogy.“

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U.S. recession will dwarf dotcom crash - The London Telegraph, Jan. 28

The recession facing the United States is of a scale that dwarfs the dotcom slump. The slowdown will cause a damaging regulation backlash as governments attempt to compensate for the financial pain facing families. Britain faces a similar plight, though it may avoid as deep a slowdown as the US.

….”We have, as relatively sophisticated, well-developed economies, gotten hooked on credit as never before,” said [Stephen] Roach, speaking about the UK and US. “If we had been running our economies the old-fashioned way, for example, where saving and consumption were funded by income, maybe we wouldn’t be in this mess we are in now.”

….The reason this crunch will be so much worse, he said, is that the chunk of the economy which is shuddering to a halt — homebuilding and housing dependent consumption — is six times bigger than the spending on IT, which triggered the last one.

“The magnitude dwarfs anything we saw seven years ago.”

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Traditional economic indicators now meaningless, most Americans already experiencing a “recession” - Barbara Ehrenreich, CommonDreams, Jan. 10

According to a CNN poll, 57 percent of Americans thought we were already in a recession a month ago. Economists may complain that this is only because the public is ignorant of the technical — or at least the newspapers’ standard — definition of a recession, which specifies that there must be at least two consecutive quarters of negative growth in the GDP. But most of the public employs the more colloquial definition of a recession, which is hard times. If hard times have already fallen on a majority of Americans, then “recession” doesn’t seem to be a very useful term any more.

….Now if those great and solemn economic indicators — growth, productivity and employment rates — have become de-coupled from most people’s lived experience, then there’s something wrong with the economists, the economy, or both. The clue lies in the word “most.” We have become so unequal as a nation that we increasingly occupy two different economies — one for the rich and one for everyone else — and the latter has been in a recession, if not a depression, for a long, long time. Not all economists can bring themselves to admit this.

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The black box economy - The Boston Globe, Jan. 27

[According to a handful of financial thinkers and theorists], the drumbeat of bad news over the past year. . . is only a symptom of something new and unsettling — a deeper change in the financial system that may leave regulators, and even Congress, powerless when they try to wield their usual tools.

That something is the immense shadow economy of novel and poorly understood financial instruments created by hedge funds and investment banks over the past decade — a web of extraordinarily complex securities and wagers that has made the world’s financial system so opaque and entangled that even many experts confess that they no longer understand how it works.

….The scale and complexity of these new investments means that they don’t just defy traditional economic rules, they may change the rules. So much of the world’s capital is now tied up in this shadow economy that the traditional tools for fixing an economic downturn — moves that have averted serious disasters in the recent past — may not work as expected.

In tell-all books, financial blogs, and small-circulation newsletters, a handful of insiders have begun to sound the alarm, warning that governments and top bankers may simply no longer understand the financial system well enough to do anything about it.

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Beware our shadow banking system – Bill Gross, Fortune/CNNMoney.com, November 28, 2007

What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.

My Pimco colleague Paul McCulley has labeled it the “shadow banking system” because it has lain hidden for years, untouched by regulation, yet free to magically and mystically create and then package subprime loans into a host of three-letter conduits that only Wall Street wizards could explain.

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New home sales: Biggest drop ever - CNNMoney, Jan. 28

New home sales posted the biggest drop on record in 2007, according to the government’s latest look at the battered housing market, as a year that saw a meltdown in the mortgage market and a drop in home values ended with yet more signs of weakness.

….This decline probably doesn’t accurately capture the weakness in prices for new homes, as about three out of four builders have reported having to pay buyers’ closing costs or offer other incentives such as expensive features for free in order to maintain sales.

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Waving Goodbye to Hegemony - Parag Khanna, The New York Times, Jan. 27

[G]lobalization is not synonymous with Americanization; in fact, nothing has brought about the erosion of American primacy faster than globalization. While European nations redistribute wealth to secure or maintain first-world living standards, on the battlefield of globalization second-world countries’ state-backed firms either outhustle or snap up American companies, leaving their workers to fend for themselves. The second world’s first priority is not to become America but to succeed by any means necessary.

….With or without America, Asia is shaping the world’s destiny — and exposing the flaws of the grand narrative of Western civilization in the process.

….The self-deluding universalism of the American imperium — that the world inherently needs a single leader and that American liberal ideology must be accepted as the basis of global order — has paradoxically resulted in America quickly becoming an ever-lonelier superpower.

….“Accidental empire” or not, America must quickly accept and adjust to this reality [of being effectively hamstrung as an imperial leader in the emerging world order by its geographic isolation from the Eurasian landmass]. Maintaining America’s empire can only get costlier in both blood and treasure. It isn’t worth it, and history promises the effort will fail. It already has.

Yesterday I received an email from one of my former high school students. He asked me a few questions that indicated he has really entered into a reflective state of mind: Am I familiar with C.S. Lewis and Mere Christianity? What do people mean when they refer to other people, situations, or anything else as “perfect”? Is there a one-size-fits-all definition of perfection? Why do most people never question the near universal assumption that life is a good and valuable thing?

I began typing my response and, as sometimes happens, saw it blossom into more than the brief note I had intended. After clicking “send,” I thought I might as well go ahead and share the letter with my Teeming Brain readers since I know they’re a reflective and philosophical lot themselves.

Note that names — or actually, just one name — have been omitted to protect the innocent.

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Hi C—,

Good to hear from you. Sounds like you’re in a really thoughtful state of mind lately.

Yes, I’ve read Mere Christianity three times in its entirety and then gone back to reread selected passages many more times. For a few years Lewis was one of my favorite writers. I still have great affection for him even though I’ve don’t hold his actual ideas in as high a regard as I once did. As he aged his writings grew more and more entrenched in a kind of puritanical Protestant morality. That’s why I like his early work better than his later work, since the early stuff is more filled with a general sense of exhilaration about ideas, philosophy, spirituality, and religion in general. Mere Christianity stands at about the halfway point in this evolution of his work. The three sections of it were originally published as three separate pamphlets before being stitched together to form of a single book. I personally find the final section, “Beyond Personality,” to be far and away the most brilliant, valuable, and exciting one. It also happens to be the most purely philosophical. Lewis’s superstar status among contemporary American Protestant Christians seems to be based largely on a love of the first half of that book, since it’s material from that part of Mere Christianity that you almost always hear quoted in churches or on the radio when somebody brings up the man’s name.

As for questions about the nature and meaning of perfection, the value or nonvalue of life, etc., it sounds like you’ve awakened to the basic philosophical cast of mind. As you may know, the word “philosophy” means “the love of wisdom.” The subject itself, which nowadays the majority of people study only for a single semester in college so they can earn a required credit to graduate, is the king or crown of all the intellectual disciplines. It’s not “about” anything in the way that history, science, mathematics, literature, economics, and other classes are “about” something. All of those other fields deal with specific subjects and content, e.g., what happened in the past and how it affects us today (history), the way the physical world works (science), and so on. But philosophy is about all of them. It asks, “What does all of this mean?” Philosophy raises the question “Why?” and applies it to everything. It tries to figure out, or at least it calls into question, most of the things that almost everybody takes for granted every day, in just the same way that you’re now asking some pretty radical questions that you felt it necessary to soften with a p.s. assuring me that you’re not contemplating suicide.

So this is all to say that I encourage you to continue your questioning. You’ll find over time that you’re experiencing a shift in your perception of absolutely everything. It begins to feel a lot like waking up from the Matrix. You start having a “Holy crap!” reaction as you realize that all of the ideas and points of view that you’ve always taken for granted are entirely up for grabs. Your whole outlook, the mental and emotional basis for the way you’ve lived your entire life and made important choices and wanted some things while rejecting others, is revealed as arbitrary. You come to recognize that you’ve believed things and held values not because you know they’re true but because you were programmed to do so by the environment in which you grew up.

This awakening is a very good thing.

You asked for advice about books. I suggest that you find a good introductory book on philosophy. One that comes to mind because it’s very accessible, and also amusing, is Does the Center Hold?: An Introduction to Philosophy. You can buy a fairly cheap used copy through Amazon. I’ve never read the whole thing myself but I’ve browsed it in college bookstores and found it highly engaging and informative.

I can’t think of any books at the moment to suggest for your specific questions about the meaning of “perfection” and the question of life’s value, but I can suggest some books that were valuable to me vry early on in my own awakening to a general philosophical cast of mind:

- The Wisdom of Insecurity by Alan Watts

- Walden by Henry David Thoreau

- Lost in the Cosmos by Walker Percy

- Irrational Man by William Barrett

The Watts book is particularly accessible and readable. The Percy book may be a bit more difficult, especially in the middle section about the philosophy of language, but early sections are especially valuable as Percy paints all sorts of hypothetical life circumstances and situations and then considers different points of view from which they can be interpreted and understood.

Since you asked me specifically about Lewis, I can recommend another of his books for you: The Abolition of Man. You might find it difficult reading. But then again, maybe not. It’s a bit different (that’s an understatement) from Mere Christianity. In it, Lewis sets out to disprove the modern idea that human ideas of morality, value, etc., are just that: human ideas. He tries to prove that there really are objective moral truths. Following him in his exploration of the issues is a very educational and mind-expanding experience, regardless of whether you agree with his arguments and conclusions. You can find used copies of the book online and in bookstores at bargain-basement prices.

Finally, I strongly urge you to read a little bit about Socrates, the ancient Athenian Greek who, for us members of Western civilization, pretty much started the whole philosophy thing. There are some good, brief online biographies. The one at History for Kids makes for extremely easy reading. Some others are more lengthy and dense.

Oh — and really finally, since I mentioned The Matrix I may as well direct you to the Sparknotes page about some of the movie’s philosophical influences. It may give you some ideas for further reading.

Good luck! I hope I haven’t blown your mind (or bored you to tears) with my reply-on-steroids to your short questions.

All best,

MC

General comment from Cardin: A few things I’m reading and hearing — none of them referenced below — suggest that January’s generalized stock market mini-crash/meltdown may have played itself out, and that the coming weeks may witness a generalized, although volatile, meltup. Only time will tell.

What’s certain is that other problematic aspects of the American economy, such as the plague of toxic debt, the epic-level writedowns among financial institutions that are accompanying it, the real estate crash, the foreclosure crisis, sky-high energy prices, and the pullback of the tapped-out-and-indebted American consumer, will continue in their current direction. If stock markets do go up for awhile in the face of all this, it may serve as evidence of a new type of “decoupling” that contrasts sharply with the popular meaning of the term as it has been used in recent years. The popular meaning, in the words of a recent Time article (”Why the U.S. Economy Still Matters“), is that the “United States, though worth 29% of the planet’s GDP, no longer control[s] the economic fate of everyone else.” As we’ve seen over the past week, it Just Ain’t So.

If the stock markets go up with many other parts of the economy still in full-blown, long-term crisis mode, a new and better use of the word “decoupling” might be to refer to the detachment of the financial economy from the rest of the economy. What exactly would it mean, and what would it feel like, for us to have a Dow at 14,000 or even higher while house foreclosures keep soaring to record heights, venerable retailers like Sears and Kmart tank to the point of crumbling (NYT: “Saving Sears Doesn’t Look Easy Anymore“), millions of consumers experience a personal financial crash due to over-indebtedness and other problems, and soaring food and fuel prices — happy news for traders in those areas, grim news for everybody else — keep squeezing us all relentlessly?

Quite simply, it would look and feel as if the financial economy had decoupled from real life. It would look like the financial world was one big hallucination, a manic game of “let’s pretend” being played by people who have forgotten they’re pretending.

What’s that again about the “hallucinated economy’ that James Howard Kunstler, John Michael Greer, and others have been talking about for several years now? What was it, for example, that Greer wrote way back in the mists of prehistory — specifically, in October 2006 — in an essay titled “Economics: Hallucinated Wealth“?

The economy of markets and statistics has aptly been compared to a circus, and like any other circus, it serves mostly to distract. While interest rates wow the crowd with their high-wire act and clowns pile into and out of various speculative vehicles, the real story of economic decline will be going on elsewhere, in the non-hallucinated economy of goods and services, jobs and personal income, all but invisible behind a veil of massaged numbers and discreetly unmentioned by the mainstream media. There’s good reason for that to be tucked out of sight, too, because it won’t be pretty at all.

Look at current headlines, and also at current life on the ground. They’re not pretty and they’ll continue to be ugly, regardless of what the hallucinatory world of the Dow etc. might do in coming weeks and months.

* * * * *

2008 will be catastrophic for U.S. economy - Richard Heinberg, Energy Bulletin, Jan. 23 (also at Heinberg’s Website, RichardHeinberg.com)

It’s becoming increasingly clear that 2008 will be a catastrophic year for the US economy, and therefore probably for that of the world as a whole. The reasons boil down to two: continuing and snowballing fallout from the subprime mortgage fiasco (exacerbated by an orgy of debt-leveraging), and record-high, continuously advancing oil prices.

….It may be enough just to call it a “depression.” Even mainstream publications are now using the “D” word, at least conditionally

….[A]s this mess unfolds we may see extreme symptoms of inflation alongside those of deflation.

For an economy, this is the worst of all possible worlds. We have never seen anything quite like it. Maybe it’s a “Perfect Storm” economy.

Fortunately, there is at least one upside to all these downers: the collapse of the current debt-and-growth based economy may finally force a redesign of the money system and the “science” of economics. But this will take a while, and it will help if there are good ideas out there being widely discussed and promoted, such as the notions of a steady-state economy or an energy-backed currency.

Meanwhile, if you’re interested in finding shelter during the storm, get thee to the productive side of the economy. Grow something, or learn to make or repair something useful.

* * * * *

A Gathering Storm - Time, Jan. 24

First it was a credit crisis, emerging last summer out of the gone-mad market for subprime mortgages in the U.S. Then it was a U.S. economic slowdown, maybe a recession, which appears to have begun in December. Now it’s a worldwide stock-market minimeltdown. At the beginning of the week, Asian and European markets plunged. Wall Street was closed on Jan. 21 for Martin Luther King Day, and to avoid the risk that it would follow other markets south, the Federal Reserve announced a 75 basis-points cut in its key interest rate before the markets opened on Tuesday. Though the street opened down, it quickly rallied — to be followed, at least at the outset, by Asian and European markets.

Say what you will about today’s global economy, it ain’t dull. And with a significant portion of the world’s economic movers, shakers and interpreters gathered in the Swiss mountain town of Davos for the annual meeting of the World Economic Forum just as markets from Mumbai to Madrid were freaking out, there was no shortage of explanations for the cur-rent chaos.

….Here’s one telling statistic, offered during the Board of Economists’ meeting by Stephen Roach, the former chief economist of Morgan Stanley, who is now chairman of the investment bank’s Asia operation: over time, consumer spending has made up about 67% of economic activity in the U.S. In recent years, consumer spending neared 72%. To rebalance the U.S. economy, the figure is probably going to have to head back to 67%. The question is how long it’s going to take. “If we take the five percentage points out this year, it will be the mother of all U.S. recessions,” Roach said.

* * * * *

Homes see first price drop on record — CNNMoney.com, Jan. 24

Prices of homes sold in December registered the biggest year-over-year decline on record, according to an industry trade group, and 2007 is the first year on record that has seen a drop. A report issued Thursday showed the problems in the housing market have not yet bottomed out.

The National Association of Realtors (NAR) said the median price of homes sold in December fell nearly 6 percent from a year earlier to $208,400. The three biggest declines in prices ever recorded have now come in the last four months.

In addition to the December price decline, NAR reported the median price for all homes sold in 2007 fell 1.3 percent to $218,900, the first time that the annual price reading has shown a decline since the group started tracking that measure in 1968.

“What we saw in December was a rough month to cap off a rough year,” said Mike Larson, real estate analyst with Weiss Research. “There wasn’t much holiday cheer.”

[Cardin comments: This serves as further evidence of just how huge -- vast, epic, gargantuan, inconceivably ginormous -- the greatest real estate bubble in history really was. "Tower of Babel," anyone?]

* * * * *

Housing prices to free fall in 2008 — Merrill — CNNMoney.com, Jan. 23

The worst housing financial crisis in decades is only going to get worse, a Merrill Lynch report said Wednesday.

The investment bank forecasted a 15 percent drop in housing prices in 2008 and a further 10 percent drop in 2009, with even more depreciation likely in 2010.

…For those who think that the worst is over, Merrill Lynch said that housing prices still remain comparatively high. The brokerage believes that home prices are still far above historical norms when compared to other measures such as rent or GDP. “By our calculations, it will take about a 20 to 30 percent decline in home prices to correct this imbalance,” said the report.

* * * * *

The Aftermath of a Phony Boom - The Daily Reckoning, Jan. 24

“Worries that the good times were a mirage,” comes a headline from the New York Times. Ah ha…the mainstream press is finally catching on to what we’ve been saying for the last five years. The boom was a phony…a fraud…a scam…a mountebank and a humbug. It was a like a polished flim-flam artist who flattered the middle classes with cash and credit - only to pick their pockets. People thought they were getting richer — that’s the illusion that soft money policies are intended to create — so they increased their expenses and went deeper into debt. Now they’re facing a serious recession in the worst financial shape of any generation in history.

….When Ronald Reagan took hold of the White House in 1980, it was a triumph of hope over despair. It was “morning in America,” he said. He was right. Yields fell for the next 25 years and hope increased.

Now the sun is setting.

* * * * *

An era of illusions - International Herald Tribune, Jan. 26

I don’t see how you can avoid a certain amount of gloom given the week we’ve just had — and its implications for the future.

….All the things that the bears have been predicting were suddenly coming to pass.

“This is nothing like I’ve ever seen,” said Peter Bernstein, author of several best-selling books on business and financial markets — and a man who has pretty much seen it all. Normally, he said, bear markets are triggered when stock values get out of hand, as was the case when the technology-stock bubble burst in 2000. But not this time. The market is in trouble because the larger economy is in trouble. “The collapse of credit is what is driving this recession,” he said.

Daniel Alpert, the managing director of Westwood Capital, wrote: “In past debt debacles, and other market crises, the affected assets have been things like commercial real estate, farmland, tech stocks and bank shares. This time around, along with the stock market, it is people’s homes, the repricing of which literally hits us where we live.”

….Even if this is not the end of an era, the events of this week, and of the past few months, have served as a reminder of how much Americans, especially, need the stock market to keep going up. Even after all this time, many, if not most, baby boomers are not financially prepared for retirement. They have invested poorly, or not set enough aside, or tried to make a killing when slow and steady would have been the wiser course. Study after study documents that stark reality. Now, time is winding down, and the thought that the market will stop going up is almost unbearable. Even though middle-aged Americans might not be prepared financially to retire, a rising stock market at least created the illusion that they could get there. One of the reasons there is so much fear right now, I think, is that illusion is being exposed.

* * * * *

A bad market? You ain’t seen nothin’ - MSN Money, Jan. 24

We may come to look at the period between July 2007 and January 2008 as a sort of phony war in the worldwide credit crisis, because although the market has fallen 15% since summer, there have been no defaults of key bonds or asset-backed securities. The curious lack of real blowups has led even seasoned observers to believe that fears were exaggerated and that chaos will be averted.

In reality, however, the skirmishes we’ve seen so far might be little more than a prelude to a deeper, harsher, longer decline than most yet perceive possible. And in a very postmodern twist, it is beginning to look like unexpected consequences of an investment instrument designed to mitigate risk could turn out to be the nuclear option that bombs the globe into the financial equivalent of World War III.

* * * * *

The worst lies ahead for Wall Street - Crain’s New York, Jan. 19

“As bad as things are for the banks, it’s only going to get worse,” says Michael Shedlock, an analyst at Sitka Pacific Capital Management. “The next shoes to drop are commercial real estate and credit card loans.”

In the past three months, Citi, Merrill, Morgan Stanley, Bear Stearns and others have tapped investors for more than $60 billion in cash to help cover their mortgage-related losses. Most firms have turned to Asia and the Middle East, far from the frozen credit markets of the United States and Europe.

“The scale is unprecedented,” says Manhattan College finance professor Charles Geisst, author of Wall Street: A History.

Furthermore, the banks’ troubles show no signs of receding anytime soon.

As is obvious from my last few posts, I’ve decided to start keeping tabs here at The Teeming Brain on doomer-sounding economic news stories, essays, analyses, op-eds, and rants. Currently the media are presenting a veritable cornucopia of these things, and they seem likely to keep it up for a very long time to come.

What’s most interesting to me about the current crisis, aside from the fact that it has made economic news as gripping to read as a thriller novel, is the way it heralds a profound and far-reaching change in the world as we all know it. This fact has been pressing more and more heavily upon my thoughts in recent weeks. A number of items appearing in the mainstream media indicate that I’m not alone.

Two days ago Michael Mandel asked in an article for Business Week, “How Real Was the Prosperity?” The question refers to the unprecedented and explosive acceleration of economic growth that marked the past several years of American life. Naturally, this growth was accompanied by prominent signs and, perhaps more importantly, an overall sense of increasing material wealth. We all felt it, even the ones of us who didn’t necessarily share in the actual money and new toys. Life in America became like a giant carnival staged in a 24-hour, multilevel shopping mall. It seemed every last one of us got a cell phone, an iPod, digital cable, high-speed Internet, a MySpace page, a McMansion, designer clothing, a designer hairstyle, an SUV, a wallet full of credit cards, several home equity loans, and a shot for stardom on American Idol.

But now the carnival is over. Now we’ve slid into a period of acute economic turmoil, with last summer’s scary seize-up in the financial markets blossoming into today’s mounting credit and banking crisis, and with the epic real estate run-up of the past several years proving itself to be not just a bubble but the mother of all such bubbles, and with the whole mess being underwritten by profligate lending practices that were encouraged in the service of fueling exotic new investment vehicles that dispersed “toxic” debt throughout the entire financial world. And standing astride it all is the Colossus of the tapped out, indebted, and increasingly demoralized American consumer, whose spending has sustained not just America’s economic growth but also the rest of the world’s from the very beginning of this brave new era of globalization.

Now that this collective body of interconnected economic hokum has finally caught the flu — or maybe pneumonia is a more apt metaphor (or perhaps bubonic plague?) — the big banks and other financial industry players look to the American Fed to “cure” them via rate cuts and so on. “But,” says Mandel in Business Week, “the underlying problems that ail the markets and the economy cannot be waved away by the Fed’s magic wand. In truth, we’re at the beginning of a long, arduous process of figuring out how much of the post-tech bubble prosperity was real and how much was the result of a credit-induced frenzy. The answer will determine what we can expect.”

By “what we can expect” I think Mandel is referring to the specific, measurable economic outcomes of the present crisis. Obviously we cannot know in advance what these will be. Prophecy is a risky business. Only time will tell what new arrangements will emerge out of the swamp of our present problems. Personally, I expect bank failures and such, but these may not come to pass.

But even though it’s too early to know specifically what awaits us, I think it’s completely safe to say that we will witness, and are even now witnessing, a revolutionary transformation of the way America does business. And this will entail a still more profound transformation. Our fundamental way of life will not emerge unaltered from all of this craziness and volatility. All of the assumptions of economic neoliberalism and globalization that have dominated and shaped the past 30 years of life in America and elsewhere are now called savagely into question, and this means we’re looking at a real upending not just of the financial and economic worlds but of our collective cultural worldview and intellectual/emotional equilibrium.

As I said, I’m seeing this hunch mirrored in a number of recent media stories. The International Herald Tribune said three days ago that we stand “On the cusp of economic history.” The article bears quoting (with emphases added by me):

Is economic history about to change course? Among the chieftains of politics and industry gathering in Davos for the World Economic Forum on Wednesday, a consensus appears to be building that the capitalist system is in for one of those rare and tempestuous mutations that give rise to a new set of economic policies.

As the prospect of a U.S. recession overshadows a tense and drawn-out election campaign in the world’s most emblematic market economy, a corrosive cocktail of factors is eating away at old certainties: Power is steadily leaking from West to East. Income inequalities are rising in rich countries.

And signs of a protectionist backlash are multiplying as worries about climate change, the rise of state-run investment funds and the bursting of the recent credit bubble give novel ammunition to those in the West who question free markets and clamor for more shelter from globalization.

What exactly will emerge when the dust settles is hard to predict, economists and executives say. But this much seems clear: With the frontier between state and market once again up for grabs, the era of easy globalization is over — and big government in one form or another is back.

The article goes on to say more about growing income inequality and other issues that have called into question the foundational assumptions of globalization. Then it concludes with a hint of momentous, imminent change:

A year and a half ago, researchers at [Daniel] Yergin’s group [Cambridge Energy Research Associates in Boston] drew up a number of scenarios for the world economy in 2030. One of them, “Asian Phoenix,” saw a world in which protectionism was kept at bay and Asian economies kept underpinning swift global growth. The other, “Global Fissure,” was a troubled world economy with widespread economic nationalism and a backlash against globalization.

At the time, the latter scenario seemed to be the more remote. But that may be changing, Yergin said. “What seemed highly unlikely,” he said, “could become rather more likely.”

The Financial Times sounds a similar note in “Ins and outs of the ups and downs,” published just today:

There is a growing belief that this spectacular sell-off [i.e., the global stock rout of the past few weeks] portends more than just a periodic shift in the market cycle. Indeed, the events are now so dramatic that they are prompting many to call into question the entire capital market architecture that has emerged over the last decade, along with the approach the world’s financial authorities have adopted since the last big break in the market — the bursting of the internet bubble in 2000.

“We have to pay for the sins of the past,” says Klaus Schwab, founder of the World Economic Forum, which is currently holding its annual gathering of political and business leaders at the Swiss mountain resort of Davos. Or as George Soros, the legendary hedge fund manager, says: “This is not a normal crisis but the end of an era.”

“The end of an era.” And there’s the rub. Eras don’t often end peacefully on a happy note of felt security. A review of history and the eras into which we commonly divide it reminds us that the end of an era involves the end of a cultural worldview, and people don’t lightly bear this overturning of their basic assumptions about life.

That this historical tide, cultural eruption, economic reversal, bubble-bursting of an era, is occurring during a U.S. presidential election year, may prove to be of epochal importance. A significant article from yesterday’s New York Times titled “Voters Show Darker Mood Than in 2000” taps into this fact very perceptively, so I’ll quote it at length:

Obviously, Sept. 11 and its aftermath have changed the country in countless and irretrievable ways. But even beyond the emergence of war and national security as pre-eminent concerns, there has been a profound reordering of domestic priorities, a darkening of the country’s mood and, in the eyes of many, a fraying of America’s very sense of itself.

While not universal, that tone pervaded dozens of interviews conducted over the last week with Americans of all political stripes in 8 of the 24 states that hold primaries or caucuses on Feb. 5, as well as with historians, elected officials, political strategists and poll takers. As the candidates fan out to New York and California and here to the heartland, they are confronting an electorate that is deeply unsettled about the United States’ place in the world and its ability to control its own destiny.

Since World War II, the assumption of American hegemony has never been much in doubt. That it now is, at least for some people, has given this campaign a sense of urgency that was not always felt in 2000, despite the dramatic outcome of that race.

Several writers and historians remarked on the psychological impact of such a jarring end to the Pax Americana, just as it seemed that victory in the cold war might usher in prolonged prosperity and relative peace (save the occasional mop-up operation). Its confluence with an era of unparalleled technological innovation had only heightened the nation’s sense of post-millennial possibility.

Now, Americans feel a loss of autonomy, in their own lives and in the nation. Their politics are driven by the powerlessness they feel to control their financial well-being, their safety, their environment, their health and the country’s borders. They question whether each generation will continue to ascend the economic ladder. That the political system seems so impotent only deepens their frustration and their insistence on results.

….Susan C. Powell, a 47-year-old training consultant who lives in a Kansas City suburb, said that what she feels is not so much hopelessness as doom.

“I know plenty of people who are doing worse than they were,” Ms. Powell said, “and nobody’s helping them out. People’s incomes are not keeping pace with inflation. People can’t afford their homes. People in their 30s and 40s, middle-income, and they don’t have jobs they can count on or access to health care. How can we say that we’re the greatest country on earth and essentially have the walking wounded?”

This all resonates powerfully with my own personal observations. For a year now I’ve been noticing the vivid slide among my immediate network of family and social acquaintances into exactly the same mood of disturbance and despair described by the Times. Many of these people are ones I never would have expected to express such thoughts and feelings. They don’t go on about it like I do, and sometimes they tire of my unending philosophical focus on the matter, but all the same, they openly say in their respective ways that they feel America is in a bad place, and the economy is screwed, and the political system is broken, and most or all of the politicians are crooks and liars, and the news media are brain dead, and bad times are upon us, and even worse times await. Sometimes I grow amazed at hearing and witnessing this shift in mood. When did everybody become a pessimist like me?

What is all boils down to is this: The tone of human society is going to be affected as much by the psychological undercutting of our collective sense of stability, security, and orientation as by the actual material effects of whatever new economic order ends up emerging from the bubbling cauldron of current events. The reason is simple: It’s a profoundly troubling thing to be told that you’ve erected your way of life and your sense of self and well being on a pack of pernicious lies.

Seeing Signs of ‘Systemic Failure’ - The New York Times, Jan. 23

“This is not a normal crisis,” George Soros, the hedge fund pioneer turned philosopher, said today to a group of reporters he had invited to lunch at the World Economic Forum. “It is the end of an era.”

It was the “era of superleverage,” he said, and regulators have not appreciated how serious it is. “Systemic failure,” he said, may be taking place.

* * * * *

Roubini: ‘Serious risk’ of global systemic financial crisis - The Daily Davos (Wall Street Journal blog about World Economic Forum), Jan. 22

Last year, Nouriel Roubini was the lone pessimist on Davos‘ five-person opening economics panel. His colleagues predicted the world economy would continue to grow strongly without overheating, a rosy scenario economists dubbed “Goldilocks”….

“2008 will be an ugly year,” he says. The question of whether the U.S. will fall into recession is stale: “Now the debate is, how bad will it be? I think it will be extremely severe.” Financial-market conditions will get much worse: “When you add all the losses, not just subprime but also soon enough on auto loans, credit cards, student loans, leveraged loans and corporate bonds, we’re looking at $1 trillion of losses in the financial system.” These massive losses, he contends, mean “there’s a serious risk of a systemic financial crisis. Not just in the U.S., but globally.”

* * * * *

Roubini: Fed got it wrong for too long, can’t stop a long and ugly recession now - Roubini’s Global EconoMonitor (excerpted at AlexWhalen.com), Jan. 23

The US has already entered into a recession and this recession will be much uglier than the mild recessions of 1990-91 and 2001 as a shopped out, saving less and debt burdened consumer is on the ropes and faltering.

The world will not decouple from the US hard landing; there will be significant recoupling and a sharp global economic slowdown. When the US sneezes the rest of the world catches the cold; and today the US will not experience just a simple common cold but rather a protracted and severe case of pneumonia; thus, the real and financial contagion to other economies will be severe.

Whatever the Fed does now is too little too late; the Fed had a wrong diagnosis of the economy and was behind the curve for over a year. The Fed claimed that the housing slump would bottom out a year ago; instead we have the worst housing recession in US history still getting much worse now. The Fed claimed that the subprime would be a niche and contained problem; instead we have had massive contagion to the entire financial system as a credit bubble and excessive debt and leverage occurred throughout the economy and the financial system. The Fed claimed that the housing problems would not spread to the rest of the economy; instead we had had real and financial spillovers and now a fall of most components of aggregate demand.

….Losses in the financial system will be greater than $1 trillion; thus there is a serious risk of a systemic banking and financial crisis.

* * * * *

Fed’s rate cut sends worrying message - The London Telegraph, Jan. 23

If yesterday’s market meltdown left any doubt in investors’ minds that we are living through extraordinary times, the 0.75pc emergency rate cut by America’s Federal Reserve has dispelled them.

The Fed’s cut comes before the opening bell in New York, deliberately so as it was designed to steady a dangerously listing ship.

….It says things are really looking very ropey indeed for the US and by extension the global economy.

* * * * *

Washington Whispers: In Private, Bernanke Tells Horror Stories - U.S. News & World Report, Jan. 22

People wondering why Federal Reserve Chairman Ben Bernanke suddenly moved to reduce the bank borrowing rate by three quarters of a point should know that in private he has expressed growing pessimism about the economy. Whispers has learned that Bernanke has told people in recent weeks that the economic situation some see falling into recession will be much worse than he has admitted to publicly.

* * * * *

Bernanke presses the panic button - Salon.com, Jan. 22

Cool and collected — the very model of a careful academic — Ben Bernanke is not the kind of man who, in his constant stream of public speeches, addresses to Congress, and regular updates on the state of the economy, expresses himself with hyperbole or irrational exuberance. He is the antithesis of CNBC’s rabid mad dog of stock speculation, Jim Cramer, forever frothing over with bug-eyed babble.

But the hyperlinked global markets of the 21st century measure a Fed chairman by his rate cuts, not his über-rational reasoning. And when you shock the world with an emergency three-quarters of a percentage point cut in the Fed Funds rate that is larger than anything the U.S. has seen in 23 years, your image as Mr. Calm is bound to take a beating. Wasn’t he telling us just a few months ago that the housing bust was “contained”?

* * * * *

Dobbs: Our leaders have squandered our wealth - CNN.com, Jan. 23

There is no question that Bush, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid will quickly come up with an economic stimulus package simply because they can no longer ignore our economic and financial crisis.

….Bush, Pelosi, Reid and the presidential candidates of both parties have an opportunity now, and I believe an obligation, to adjust the public policy mistakes of the past quarter-century that have led to this crisis. And only through courageous policy decisions will we be able to steer this nation’s economy away from the brink of outright disaster.

….We all have to acknowledge that our problems were in part brought on by the failure of our government to regulate the institutions and markets that are now in crisis.

….All Americans will soon have to face a bitter and now obvious truth: Our national, political and economic leaders have squandered this nation’s wealth, and the price of this profligacy is enormous, and the bill has just come due for all of us.

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The politics of an economic nightmare - Salon.com, Jan. 23

How much worse can it get? The housing bubble drove home prices up 20 to 40 percent above historic averages relative to earnings and rents. So now that the bubble is bursting, you can expect prices to drop by roughly the same amount, and new home construction to contract. The latter plunged last month to its lowest point in more than 16 years. A managing partner of a large Wall Street financial house told me a few days ago the scenario could get much worse. He gave a 20 percent chance of a depression.

….In reality, the crisis is both a credit crunch and the bursting of the housing bubble. Wall Street is in terrible shape and Main Street is about to be in terrible shape. And there’s not a whole lot that can be done about either of these problems — because they are the results of years of lax credit standards, get-rich-quick schemes, wild speculation on Wall Street and in the housing market, and gross irresponsibility by the Fed, the Treasury and the Comptroller of the Currency.

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Foreclosures Prompt Cities to Make Plea for Aid - The New York Times, Jan. 24

Facing a collapse in the subprime mortgage market that has pockmarked their cities with vacant houses and crippled their budgets, the nation’s mayors pleaded Wednesday for a huge infusion of federal aid.

As more than 250 mayors gathered in Washington for the winter meeting of the United States Conference of Mayors, many agreed that the collapse of the subprime market had left a growing problem of vacant houses, depressed property values, tighter credit, and a need to cut services to close municipal budget gaps.

“It’s an economic tsunami that is hitting our cities,” said Mayor Douglas H. Palmer of Trenton, the president of the conference. “We need federal action not six months from now, but within the next 30 days.”

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The Coming Financial Collapse of America: Today’s Market Bloodbath Is Only a Taste - Mike Adams at Speaking Truth to Power (reprinted from NewsTarget.com), Jan. 23

My prediction for 2008 - 2012 is a massive wave of municipal bankruptcies, state bankruptcies and escalating national debt. We are going to see cities and states go belly up, pension programs terminated (or watered down), and financial institutions teetering on the brink of disaster.

….This financial situation won’t head straight down. The Plunge Protection Team in Washington (and at the Fed) will do their best to keep propping up this economy like a Weekend At Bernie’s. So you’ll see short-term recoveries and stock prices jumping up and down probably all year. The markets may even reach new highs as the Fed hyperinflates the currency by injecting easy money into the system. As usual, it’s all a scam. The unavoidable trend is the ultimate downfall of the debt-ridden U.S. economy and a massive recalibration of this nation’s economic behavior, which may or may not include the dissolution of the nation itself. American may somehow survive this unprecedented debt crisis. Then again, it may not.

U.S. Moves to Avert Economic Meltdown - Associated Press, Jan. 23

Jolted by global recession fears, the Federal Reserve slashed interest rates Tuesday, and President Bush and leaders of Congress joined in a rare show of cooperation in promising urgent action to pump up the economy with upwards of $150 billion in tax cuts and government spending.

Market meltdowns overnight around the globe and growing anxiety at home stirred lawmakers and the administration toward swift action, possibly within a few weeks. Wall Street plummeted as the day began, following Asian stocks, then warily eased its sell-off after the Fed ordered the biggest cut on record in a key interest rate. The Dow Jones industrials, down 465 points at one point, closed the day off 128.

….”The urgency that we feel at home is now even more urgent as we see the impact of our markets on others,” House Speaker Nancy Pelosi said after both Democratic and Republican lawmakers met with Bush at the White House.

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Worst finance crisis since WW2 - Soros - The Age (Australia), Jan. 22

Billionaire investor George Soros said the world was facing the worst financial crisis since World War Two and the United States was threatened with recession, according to an interview with the Austrian daily Standard.

“The situation is much more serious than any other financial crisis since the end of World War Two,” Soros was quoted as saying.

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High gas prices: Recession proof - CNNMoney.com, Jan. 22

Contrary to popular belief, Americans facing a looming recession should expect little relief in the form of lower gas prices, experts say.

Despite recently falling oil and gasoline prices, strong worldwide demand, refinery shortages, and OPEC production cuts should keep gasoline well above $2 a gallon in 2008.

Slower consumer spending and rising unemployment - traditional harbingers of an economic downturn - are unlikely to drastically reduce energy prices. Oil isn’t expected to fall below $60 a barrel from its current level of $90 and gasoline should bottom out around $2.30-2.50 a gallon from around $3 currently, experts say.

“That’s the floor, even in a global recession,” said Simon Wardell, an oil analyst at consulting group Global Insight. “The overall balance is going to remain pretty tight.”

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Is This the Big One? - Information Clearing House, Jan. 21

On Monday, fears of a US recession spilled over into Asian markets sending stocks tumbling. Indexes were hammered across the board in what turned out to be the worst day of trading since 2001.

….The huge sell-off is a sign that global investors do not believe that the Fed’s rate cuts or President Bush’s $150 billion “stimulus package” can revive the flagging economy or breathe new life into the over-extended US consumer. After Monday’s sharp downturn, the prospects for averting a deep and protracted recession are slim to none.

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Devastating Crisis Unfolds - Solidarity, Jan. 2008

The current crisis could well turn out to be the most devastating since the Great Depression. It manifests profound, unresolved problems in the real economy that have been — literally — papered over by debt for decades, as well as a shorter term financial crunch of a depth unseen since World War II. The combination of the weakness of underlying capital accumulation and the meltdown of the banking system is what’s made the downward slide so intractable for policymakers and its potential for disaster so serious. The plague of foreclosures and abandoned homes — often broken into and stripped clean of everything, including copper wiring — stalks Detroit in particular, and other Midwest cities.

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How greed, ’supercapitalism’ and ‘Richistan’ are changing America - CNNMoney, Jan. 21

The sad truth is: We’re all selling our souls to the “company store.” Not just the boardroom “suits” (the greedy CEOs getting hundred million dollar severance packages, and all the greedy directors now selling equity to foreign nations to cover up their gross negligence). No, today everybody is selling their soul, everybody secretly wants to become a millionaire and retire rich. And the media panders to this darker side.

….Supercapitalism is killing American democracy. So we substitute MySpace, Facebook, iPods, videogames, game shows and insignificant egocentric communities for our rights as American citizens, while still working in the “coalmines.” Worse yet, political rhetoric aside, we really don’t expect change.

….Oh, stop denying it! The glue binding all Americans, rich or poor, is self-interested greed, pure Adam Smith economics. We all want more, we want it now, and more is never enough. Hidden just below the surface of the new supercapitalism is a dark Faustian bargain: We’re all trapped by our addiction to more, as investors and consumers we’ve bargained away our soul.

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Worries That the Good Times Were a Mirage - The New York Times, Jan. 23

Until a few months ago, it was accepted wisdom that the American economy functioned far more smoothly than in the past. Economic expansions lasted longer, and recessions were both shorter and milder. Inflation had been tamed. The spreading of financial risk, across institutions and around the world, had reduced the odds of a crisis.

Back in 2004, Ben Bernanke, then a Federal Reserve governor, borrowed a phrase from an academic research paper to give these happy developments a name: “the great moderation.”

These days, though, the great moderation isn’t looking quite so great — or so moderate.

The recent financial turmoil has many causes, but they are tied to a basic fear that some of the economic successes of the last generation may yet turn out to be a mirage.

….The great moderation now seems to have depended — in part — on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.

Now, some worry, comes the payback.

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Are American consumers too strapped to spend? - Minneapolis Star Tribune, Jan. 23

Americans have shouldered this patriotic duty [to shop their way out of national economic troubles] for at least seven years. But whether they’re still up to the task remains to be seen.Many U.S. consumers are tapped out — over-mortgaged and over-borrowed with no savings to fall back on. The homes that helped finance their spending sprees are now falling in value, and higher food and energy costs are digging deeper into their wallets daily. Increasingly, they’re falling behind on mortgage and car payments as well as credit card bills.

But there’s something more, and it’s new, said Jerrold Peterson, economics professor emeritus at the University of Minnesota at Duluth. It’s fear.

“For every one mortgage foreclosure there are four of us saying, ‘There but for the grace of God go I,’” Peterson said.

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Markets Force Fed to Make Big, Risky Rate Cut - Bloomberg, Jan. 23

Federal Reserve officials, responding to the risk that plunging stock markets around the world posed for U.S. economic growth, cut the benchmark interest rate by 75 basis points. The Fed’s unexpected action carries its own risk –that investors may be spooked even more by a hint of panic at the central bank.

“This extraordinary action was excessive and smells of fear,” said economist Willem Buiter, a professor at the London School of Economics and Political Science and a former member of the Bank of England’s Monetary Policy Committee.

“It is the clearest example of monetary policy panic football I have witnessed in more than 30 years as a professional economist,” Buiter said in an Internet posting yesterday.

Global economic crisis ’serious’: IMF chief - Associated Press, Jan. 21, 2007

The head of the International Monetary Fund called the global economic situation “serious” and said markets worldwide had responded skeptically to a U.S. stimulus plan.

Dominique Strauss-Kahn stressed that a U.S. recession would affect economies across the globe.

“The situation is … serious,” said Strauss-Kahn following a meeting in Paris with French President Nicolas Sarkozy. “All the countries in the world are suffering from a slowdown in growth in the United States.”

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Fullblown Panic - James Howard Kunstler, Jan. 21

A whole closet full of “other shoes” is now waiting to be dropped. Surely the biggest clodhoppers in the closet belong to the hedge funds, representing trillions and trillions of dollar-denominated “positions” which, however hallucinatory, had previously yielded enough real “money” year-by-year to keep all the realtors and Humvee dealers in the Hamptons goose-stepping to Goldman Sachs’s drumbeat. These “positions” can’t help now from moving into counterparty crisis territory, especially as the bond insurers such as MBIA and Ambac go up in a vapor, and if that happens the damage could be so colossal globally that Stephen Hawking might have to be brought in to run the Federal Reserve.

This is going to be a rough week. Fastening your seat belts may not be enough for this ride. Better superglue yourselves to the floorboards and pray for God’s mercy.

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Wall Street set to plunge - CNNMoney.com, Jan. 22

Wall Street looked set to join the global market rout early Tuesday, as the threat of a U.S. recession battered sentiment worldwide.

At 7:48 a.m. ET, futures were indicating a disastrous start. Dow futures were down 4.5 percent while S&P futures lost 5 percent. Such a decline would mark the sharpest drop at the open for U.S. stocks since the first session following the Sept. 11 terrorist attacks.

“It’s going to be a very rough ride this morning for U.S. equities,” said Art Hogan, chief market analyst at Jefferies & Co.

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Hong Kong Index Plunges 8.7% - Yahoo! Finance, Jan. 22

Hong Kong Index Plunges 8.7 Percent Amid Second Day of Global Sell-Off

Hong Kong shares plunged Tuesday, with the benchmark index tumbling as investors dumped shares on fears a U.S. recession will spark a global slowdown.

The Hang Seng Index dropped 2,061.23 points, or 8.7 percent, to 21,757.63. That’s the most points the blue chip index ever lost in a single day, but just shy of the 8.8 percent it plummeted after the Sept. 11 attacks on the U.S. in 2001.

….Markets across Asia fell sharply on Tuesday for a second straight day amid investor pessimism over the U.S. government’s stimulus plan to prevent a recession. China’s benchmark Shanghai Composite Index fell 7.2 percent, and Japan’s Nikkei dropped 5.7 percent to a two-year low.

“You can see investors have lost confidence in the U.S. government’s ability to handle the subprime situation,” said Pang with Sun Hung Kai.

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Bank of America net sinks 95 percent - Yahoo! Finance, Jan. 22

Bank of America Corp, the second-largest U.S. bank, said on Tuesday fourth-quarter profit sank 95 percent, hurt by more than $7 billion of losses tied to poor trading decisions and mounting credit woes.

…. It was the latest in a series of earnings declines among the largest U.S. banks as the nation’s housing crisis and a slowing economy lead to a growing number of consumers falling behind on their bills.

Hmm. It’s been a month and a half since I made the first of six announced updates. Tempus fugit.

Right about now, for various reasons, I want to upload this post before it’s possible for me to groom it properly. The haste is due to the fact that I want to beat the American stock markets opening tomorrow, so that I will have committed myself, as it were, by making my opinions public, and can then see whether I was even remotely correct in my expectations of a wild economic roller coaster ride exploding into motion tomorrow morning, January 22, 2008.

What follows is a handful of messages that I’ve posted in various discussion threads at various Internet message boards, and also in some private emails, over the past couple of days. I’ve leave the contexts out and simply give the passages without explaining their settings.

Oh — and good luck to everybody reading this. Economic life just may be about to get very troublesome and strange for many of us.

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I’m so far from being economically educated that it’s almost laughable, but over the past four years I’ve become positively fascinated with our macroeconomic situation and have taken to watching and reading financial news (and also geopolitical and other, related stuff) with a positively voracious appetite. And last October I saw the stars line up just right and began to realize with a sinking feeling that a major meltdown, blowup, shitstorm (pick your metaphor) is almost certainly situated right in the January-through-May 2008 corridor. I’ve lightly expected such a thing for quite some time now but the feeling that came over me in October was of something palpable, something definite, something concretely forecastable in the immediate future.

After having already realized this, I saw John Michael Greer advising his readers at The Archdruid Report in a post titled “Waiting for the Other Shoe” to shed speculative investments and keep extra food on hand in view of the imminent possibility of a major economic discontinuity. This is pretty strong stuff for Greer, who is one of the most prominent peak oilers forecasting the gradual decline scenario for industrial civilization as contrasted with the doomer/catastrophist expectation of rapid and catastrophic destruction.

Then I began to hear a snowballing cacophony of dire predictions emanating not only from the alternative news sources I regularly monitor but from the mainstream press as well.

Events in November, December, and the first half of January have continued to line up absolutely perfectly in support of my original hunch of something prominent, swift, and ugly happening in the very near term. Who knows, the new revelations about the problems with the bond insurers may be the final shoe to drop and the straw that broke the camel’s back.

I work at a public school in a rural Midwestern American town, and last November I wrote a long letter to the school system’s superintendent warning her that she ought to be aware of the economic storm that’s shaping up since she’s the literal and symbolic figurehead of one of the town’s most prominent institutions. I’ve continued to update her about it periodically. I’ve also warned my principal, as well as friends, family, and a few of my students.

In terms of the overall “big picture,” I really don’t think there’s such a thing as the “big one,” as in, some single catastrophic event that will undo America or civilization in general. Well, okay, global nuclear war might do the trick, or a super plague. But short of these semi-science fictional possibilities, it’s silly and counterproductive t